Section 7 application against corporate guarantor upheld despite insufficient assets to clear debt

NCLAT dismissed an appeal challenging admission of Section 7 application against a corporate guarantor. The appellant argued the corporate debtor's single asset was insufficient to clear the financial creditor's debt or resolve insolvency. NCLAT held that debt and default were clearly established on record. Insufficiency of assets to resolve insolvency cannot prevent initiation of CIRP against a corporate debtor unable to pay debts. Such issues must be addressed during CIRP proceedings and cannot constitute grounds for setting aside admission orders under Section 7.

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Issues Involved:
1. Validity of the order admitting Section 7 application.
2. Existence of debt and default by the corporate debtor.
3. Impact of the pending review application on the finality of the DRT order.
4. Admissibility of Section 7 application based on the recovery certificate.
5. Sufficiency of the corporate debtor's assets for CIRP.

Detailed Analysis:

1. Validity of the order admitting Section 7 application:
The appeal was filed by the Suspended Director of the corporate debtor challenging the order dated 25.01.2024 by the National Company Law Tribunal (NCLT), New Delhi Bench, admitting Section 7 application filed by DBS Bank India Ltd., the Financial Creditor. The Section 7 application was filed against the corporate debtor, M/s. Abhisar Impex Pvt. Ltd., which acted as a corporate guarantor for the principal borrower, M/s. Vayam Technologies Ltd. The NCLT admitted the Section 7 application after finding the existence of debt and default.

2. Existence of debt and default by the corporate debtor:
The financial creditor extended working capital facilities to the principal borrower, which were renewed in 2012 and 2013. The corporate debtor executed a corporate guarantee in 2012 and created a charge on a commercial property. Due to the principal borrower's failure to repay, the financial creditor issued a Loan Recall Notice and subsequently filed an application before the Debt Recovery Tribunal (DRT) for recovery. A settlement was reached but not honored, leading to the issuance of a Recovery Certificate by the DRT for Rs. 23,29,19,212.46/- along with 18% interest. The corporate debtor failed to pay, and the financial creditor invoked the corporate guarantee, leading to the filing of the Section 7 application.

3. Impact of the pending review application on the finality of the DRT order:
The appellant argued that the DRT's order dated 15.07.2019 was not final due to a pending review application. However, the DRAT's order dated 08.12.2022, which disposed of the appeal with liberty to revive it if the review application was decided against the corporate debtor, did not affect the validity of the DRT's order. The Adjudicating Authority found that the debt and default were fully established, as evidenced by the Recovery Certificate.

4. Admissibility of Section 7 application based on the recovery certificate:
The Adjudicating Authority relied on the Supreme Court judgment in "Dena Bank vs. C. Shivakumar Reddy," which held that a recovery certificate provides a fresh cause of action for filing a Section 7 application. The recovery certificate issued by the DRT confirmed the debt and default, thereby justifying the admission of the Section 7 application. The details of the financial debt and default were meticulously recorded in Part IV of the Section 7 application.

5. Sufficiency of the corporate debtor's assets for CIRP:
The appellant contended that the corporate debtor had only one asset, which might not suffice for the resolution process. The Adjudicating Authority dismissed this argument, stating that the initiation of the Corporate Insolvency Resolution Process (CIRP) is based on the existence of debt and default, not on the sufficiency of assets. The insolvency process against the principal borrower had already commenced, and similar proceedings against the corporate debtor were deemed appropriate.

Conclusion:
The appeal was dismissed, with the Tribunal finding no merit in the arguments presented by the appellant. The order of the Adjudicating Authority admitting the Section 7 application against the corporate debtor, who was a corporate guarantor, was upheld. The existence of debt and default was clearly established, and the pending review application did not impact the finality of the DRT's order. The sufficiency of the corporate debtor's assets was not a valid ground to set aside the order of admission under Section 7.

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